Aluminum Inflection Point . . . China Exporting

Conclusion: Chinese data for April show China being a net exporter of aluminum, which is bearish for the price of aluminum and bullish, on the margin, for the Yuan.

As it relates to commodities, we watch Chinese supply and demand very closely as China is the key swing factor globally for many commodities. The April data for aluminum was particularly meaningful as China became a net exporter for the first time since late 2008.

China is currently the world’s largest producer and user of aluminum, so its influence on that market can be dramatic. As mentioned, for the first time since 2008, China exported more aluminum than it imported. Specifically, exports rose to 48,546 tons, which exceeded imports of 28,987 tons. This inflection of exports is not surprising, as Chinese aluminum productive capacity has expanded 20% this year, which has led to a massive building of aluminum stock piles in China. These stock piles are estimated to be at 489,495 tons, up ~61% year-to-date, based on data from the Shanghai Futures Exchange.

There is also a political implication to increased exports from China. In late April, the U.S. Commerce Department indicated they planned to investigate whether some Chinese aluminum products are getting unfair subsidies. The crux of the argument is that the artificially low price of the Yuan provides cheap manufacturer costs for aluminum and aluminum products within China, which provides a competitive advantage on the world stage. As the production of aluminum in China continues to exceed its internal demand, the potential for this to become a political issue will further increase and are likely supportive of an eventual revaluation of the Yuan.

While this data point is bearish for the price of aluminum and bullish, on the margin, for the Yuan, it is difficult to read much into the implications for China. Aluminum is the world’s second most produced metal, after iron, and is used in a myriad of end products, including: vehicle production, construction (windows, doors, siding, etc), household items, power lines, and electronics. Given the wide varied of end use, the Chinese government has ramped up its internal production of aluminum well ahead of even its normal use of aluminum. Thus, this inflection does not necessarily suggest a slowing of the end markets in China.

On the bullish side of the equation for aluminum price, last week China also indicated that it may raise power surcharges on some aluminum companies by as much as 100 percent in June, to curb this growing over capacity. To the extent this goes from rhetoric to policy, it will certainly slow production of aluminum in China, which will serve to draw down stock piles and put supply and demand back into balance.

1Q Retail sales surged 36% YoY to MOP 6.85 BN. According to IM, higher shopping spending in Macau have benefited many malls such as the Venetian's Grand Canal Shoppes and Shoppes at Four Seasons which have seen sales double and up 80% YoY, respectively.

Customers seem to be more receptive to shopping promotions than gaming promotions. Also, an important aspect of the resorts' success is the ability to use their retailers as an effective customer-relations tool with high-end gamers. For example, by having a partnership with Rolex as its 2nd largest supplier, Wynn is able to incentivize gamers to come back for more rolling-chip sales.

On Cotai, the relaunch of the Sands Rewards Club seems to draw in more mainland customers, while One Central at MGM Grand Macau seems to be underperforming, though it is still early as more shops will open in the coming months.

MARINA BAY TO BENEFIT FROM GOOD TIMING Sydney Morning Herald

The near completion of Marina Bay Financial Centre's (MBFC) many suites and apartments comes at a time of a robust Singapore housing market. As part of the first stage of MBFC's complex, the new Marina Bay residences (55-story block) are set to be "topped out", which means construction internally will begin in earnest in the near term.

The executive director of residential for CBRE, Joseph Tan, believes that the Singapore residential market is continuing the momentum from the mass market achieved in 2009. Eventually, it will trickle up to the mid and prime segments. He also said that prices are generally higher in 2010 and that the total value of transactions at the end of 2010 should be higher YoY ($S16.22 BN) but lower than that in 2007 ($S23.52 BN).

VISITORS ARRIVALS FOR APRIL 2010 DSEC

Total visitor arrivals increased by 13.1% YoY to 2,111,563. Visitors from Mainland China grew by 17.3% YoY to 1,052,610, with 390,031 traveling to Macau under the Individual Visit Scheme, up by 13.9% from April 2009 (342,458).

GAMING TAX REVENUE KEEPS RISING macaubusiness.com

Macau registered a budget surplus of MOP17.8 billion in the first four months of 2010, a YoY increase of 96%. Direct taxes from gaming rose 54% YoY.

TOURISM SWEETNER macaubusiness.com

All licensed businesses and activities registered until December 2009, including hotels, guesthouses, restaurants, nightclubs, bars, sauna and massage parlours, health clubs and karaokes, travel agencies, as well as tourist guides, will be exempt from renewal fees for licenses and ID cards issued by the Macau Government Tourism Office (MGTO). The exemption is valid until the end of this year only and has retroactive effects to October 2009.

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05/24/10 08:14 AM EDT

WEEKLY RISK MONITOR FOR FINANCIALS - RISK CONTINUES TO RISE

Our risk monitor this morning is topical and timely as the European situation continues to push spreads out further. While our charts below reflect week over week changes through Friday's close, as of this morning the TED Spread has widened further to 36 bps. While still significantly below crisis levels, it's the trajectory that matters and the trajectory has been moving steadily higher for the last few weeks. As long as this measure is rising, we think it is unlikely that Financials will outperform, notwithstanding a short-term snap-back rally.

Overall, 6 of the 8 measures registered negative readings on a week-over-week basis, while 2 were positive.

Our risk monitor looks at the following metrics weekly:

1. CDS for all available US Financials (30 companies).

2. High Yield

3. Leveraged Loans

4. TED Spread

5. VIX

6. Greek Bond Spreads

7. Markit Subprime Spreads

8. AAII Bulls/Bears Sentiment Survey

1. Financials CDS Monitor- Credit default swaps in Financial companies were worse across the board last week with the largest widening coming from AGO, AIG, and GNW. The smallest increase week over week was at TRV, AON, and MMC. Swap prices remain considerably elevated compared to a month ago, with the most widening at AIG, GNW, and HIG. Conclusion: Negative.

3. Leveraged Loan Index Monitor- Leveraged loans fell last week, closing at 1464, down from 1491 where they went out the week prior. Conclusion: Negative.

4. TED Spread Monitor- The TED Spread is a great canary. It rose last week closing at 33.2 bps up from 27.3 bps in the week prior. Conclusion: Negative.

5. VIX Monitor - The VIX is admittedly a far more coincident indicator, but we include it as a general reflection on the equities market. Last week the VIX closed at 40.10 up from 31.24 the week prior. Conclusion: Negative.

6. Greek Bond Yields Monitor- The Greece situation remains in flux and so we include Greek Bond 10-Year Yields as a reflection of that dynamic. Last week yields fell slightly to 782 bps from 802bps. Conclusion: Positive.

7. Markit ABX Index Monitor - The Markit ABX Index was generally flat/down vs the prior week. We use the 2006-2 series and look at the AAA, AA, A and BBB- series. We include this measure as a reflection of what is going on in deep subprime distressed paper. Conclusion: Neutral/Negative.

8. AAII Bulls/Bears Monitor- The Bulls/Bears survey grew more Bullish on the margin vs last week. Bulls increased by 4.7% to 41.3% while Bears fell 2.9% to 33.9%, putting the spread at 7.6% on the bullish side, versus a even split last week. Conclusion: Positive.

Joshua Steiner, CFA

Allison Kaptur

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05/24/10 08:06 AM EDT

US STRATEGY - STILL BROKEN?

The S&P 500 closed higher on Friday, but not enough to put any sector back to positive on TRADE or TREND. After opening sharply lower, the S&P 500 quickly turned higher for the day led by a rally in Financials (XLF) and Materials (XLB). Thursday evening’s Senate vote finally brought some clarity on the potential winners and losers from the pending financial regulation efforts, with the BKX leading the way up 3.98% on the day. Money-center banks outperformed with JPM up 5.9%, BAC up 4.5%, and investment banks also outperformed with GS up 3.3% and MS up 5.7%.

On the MACRO front, there was no major economic data released on Friday and there was little incremental news flow from Europe regarding its sovereign credit concerns.

On Friday, the euro rallied for the fourth straight day, but in early trading today it is giving up some of its recent gains. The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade (1.21) and Sell Trade (1.25). Despite this brief reprieve for the euro, the issues in Europe continue to be a drag on sentiment.

The Materials (XLB) was the second best performing sector yesterday, rebounding from Thursday’s sharp decline. Notably, the S&P 500 Steel index closed up 3.2% on the day. On Friday, Copper prices rose 4%; the increase was attributed to Chinese optimism and improved imports numbers. The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (3.01) and Sell Trade (3.28). With the Chinese market up 3.5% overnight and Copper trading up 1%, the XLB outperformance will likely continue.

Precious metals were a decliner on Friday; Gold closed down 0.5% to $1,177, and off the record highs seen on May 12th. The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,182) and Sell Trade (1,215).

Overall, Technology (XLK) underperformed on Friday, but the SOX (+2.50%) outperformed on the day. The sector has seen been under pressure over the past month (down 10.8%), but positive earnings releases this week, and especially guidance upside capped by MRVL (+8.3%) provided the lift.

Over the short-term, elements of "flight to safety" in the U.S. dollar will help to contain short-term U.S. inflation. In early trading, the DXY is currently trading up over 1%, although we suspect that the U.S. dollar has its own issues to face at some point in the intermediate term future. The Hedgeye Risk Management models have the following levels for the USD – Buy Trade (84.23) and Sell Trade (86.97).

Equity futures are trading below fair value following Friday's bounce which came at the end of a volatile week for stocks. As we look at today’s setup, the range for the S&P 500 is 58 points - 18 points or 1.6% (1,070) downside and 40 points or 3.7% (1,128) upside. For the first second day, the Hedgeye Risk management models have 0/9 sectors on TRADE and 0/9 sectors positive on TREND. On the economic front, the April Chicago Fed Nat Activity Index and April Existing Home Sales will be reported today.

Oil is currently trading lower for the tenth straight day, as the Dollar index is surging. The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (68.04) and Sell Trade (73.40). In credit markets, the TED spread is at 0.34 this morning and three-month LIBOR has ticked up to 0.496, suggesting that risk perception continues to grow in global markets.

Howard Penney

Managing Director

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05/24/10 07:48 AM EDT

2-Ways

"I saw a couple fall out, and I had one in the back of my throat. I could feel it and coughed it out.”

-Duncan Keith

Whether on the ice or in the market, there is nothing that gets me smiling as much as winning does. After helping secure the Chicago Blackhawks first Stanley Cup Final birth since 1992 yesterday, Assistant Captain, Duncan Keith, was all smiles last night – minus the 7 teeth he lost during the game.

“They just stuck a bunch of needles in there and froze it all up. It feels a lot better when we win,” the selfless Olympic Gold Medalist from Winnipeg, Manitoba said. Gotta love having a 2-Way defenseman like that on your team!

This market went 2-Ways on Friday and created exactly what the game of buy low/sell high capitalism should create – winners and losers. After gapping down on the open, there was an epic intraday short squeeze into the market close, leaving reactive/undisciplined players missing a lot more than some teeth.

We don’t always get things right, but we have had the hot hand as of late and aren’t shy to show people the replay. This market needs some leadership. It’s time that we, the people of America, take both this country and stock market back. Many more of you are winning alongside us than ever before. For that, we are grateful.

Back to the replay - in anticipation of the San Jose team about to feel as much shame as the S&P futures trader who short sold SPX 1056 pre-open, we had a premonition about a snap back SP500 rally and wrote a note to our subscribers at 10:55AM EST titled “The Shark Tank.” Here’s an excerpt:

“The thick green line in the chart below is the line you should be laser-like focused on. That’s the long term TAIL line of support for the SP500 at 1070. And we need more price, volume, and volatility data than a 1.5 hour feeding by Squeezy The Shark to validate it.”

I’m going to give this 3 days. If the long term TAIL line of support can hold, the SP500 has no resistance up to the 1125 line. That would be a 5% squeeze that performance chasers and monkeys alike cannot afford to miss.”

Premonition obviously, we had not. This is math, not alchemy. An no, I don’t have all my teeth…

This morning the game of globally interconnected risk continues, and here are some things were seeing on the positive and negative side of our proactive risk management playbook:

Positive:

SP500 long term TAIL line of support (1070) held on a closing basis on Friday.

Advance/Decline line 74% to the bullish side on Friday.

SP500 Sector Risk Management Model flashed positive in all 9 Sectors.

China’s stock market followed up on Friday’s strength this morning making for a 2 day move of +4.6% (leading indicator?).

Taiwan and Australia, closed up +1.2% and +2%, respectively, broadening the rally in Asia.

Brazil closed +3.6% Friday and, like China, needs to show some follow through this morning holding high-lows.

Gold prices are bouncing this morning right at the immediate term TRADE line of support = 1182.

Dr. Copper pops his head back above our long term TAIL line of support ($3.01/lb), combined with the rally in China = good.

Volatility (VIX) remains a raging bull with immediate term TRADE support/resistance now 33.04-45.43.

SP500 Sector Risk Management Model still has all 9 sectors in bearish intermediate term TREND position.

Japan was down again overnight and remains one of the big sovereign debt elephants in the globally interconnected room that worries Mr. Macro Market.

European equity markets rally on hope (low volume) and continue to look awful across all 3 of our investment durations (TRADE, TREND, TAIL).

WTI oil price remains broken across all 3 durations with the long term TAIL of resistance overhead at $75.63/barrel.

Compression in the Piggy Banker Spread (Yield Spread) continued week/week down to 245bps this morning vs. 267bps last Monday.

The Euro rallied right up to where it should have but makes another lower-high at $1.25 and is selling off again (our downside target remains $1.21).

Managing risk doesn’t happen in the vacuum of certainty. Sometimes you take a puck to the head. There are plenty of bullish and bearish data points across your screens this morning and the goal of this game remains getting the timing right.

What risks are priced in and on what duration? What is the proactive plan on market strength or weakness? What risk management levels do you have confidence in and what are your macro calendar catalysts?

No one ever said managing globally interconnected risk is easy, but I can tell you this – you need to play this game 2-ways.

Best of luck out there this week,

KM

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05/24/10 12:00 AM EDT

The Spanish Economy Is About To Get Gored...

Early Look

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